Colorado-Real-Estate-Journal_387413

Page 8 — Retail Properties Quarterly — February 2024 www.crej.com MARKET UPDATE Advisors to the best names in retail+ SRS’ Denver team provides best-in-class real estate services to our clients in Colorado and across the West. TENANT SERVICES OWNER SERVICES CAPITAL MARKETS DEVELOPMENT SERVICES 1875 Lawrence Street, Suite 850 | Denver, CO 80202 | 303.572.1800 SRSRE.COM/Denver I f we were sitting with an astrologer, trying to learn more about the future of retail, we might see that a new moon is rising in our favor. Fortunately, we have the benefit of solid, con- temporary data that speaks more clearly: Retail real estate is having a moment. Emerging from the pandemic, dur- ing which landlords negotiated lease terms to keep tenants afloat, the proverbial tides have turned. The retail apocalypse predicted during that period wasn’t fulfilled, accord- ing to Dr. Thomas LaSalvia, head of commercial real estate economics at Moody’s Analytics. Historically, this wasn’t always the case. Over the last 15 years, retail real estate business prospects were not always viewed as a solid asset sector, and circumstances sometimes seemed dire. Between the Great Recession, the explosion of e-commerce and the economic effects of the COVID-19 pandemic, we saw bankruptcies, vacancies and the closure and extreme chal- lenges for many businesses ranging from street retail and restaurants to big-box stalwarts like Bed Bath & Beyond, DSW, Best Buy and others. This same period was also defined by an alarming slowdown of new construction. According to one data analysis, just 8 million square feet of new retail space was constructed last year – compared to about 20 million sf in 2019. But leasing leverage that brings rent increases represents fun- damental progress for retail real estate. According to Coresight Research, store openings outpaced closures for the second straight year in 2023 after years of net closures. Add this to a dearth in new construction, and landlords are optimistic that retailers will be vying for limited available space for the foreseeable future, driving rents higher. n Consumer influence – a new love for convenience. Landlords and investors are also affected by the constant evolution of consumer preferences, moving from Main Street to shopping malls to big box and back again with a huge overlay of e-commerce for good measure. For the moment, shoppers appear to have a growing dislike for over- sized retail environments, which may continue to soften demand for department stores and older malls. By necessity, smart retailers are shifting strategy, using the data they gleaned during the pandemic lull to crunch the numbers, pinpoint- ing their best-performing locations while shuttering underperforming assets. Preferences are also changing store footprints for larger retailers. According to CoStar Group, retailers signed leases averaging 3,200 sf dur- ing the first three quarters of 2023, the smallest size since CoStar Group began tracking this metric in 2006. Major retailers like Ikea, Macy’s, Nike and others are testing smaller spaces and showrooms with con- venient locations to meet their cus- tomers closer to home. Amid these larger retail ventures, we feel like we continue to see growth in neigh- borhood retail and specialty grocers. While Amazon isn’t going any- where, consumers have emerged from the pandemic with a strong desire to shop in-person, taking advantage, in particular, of the ease and quickness of convenience cen- ters’ bagel shops, dry cleaners, and hair and nail salons. Right now, the intersection of popular convenience (strip) centers, rising lease costs, and less available space is influenc- ing strong brands (Chipotle, Chase) to locate in these centers versus more costly open-air or big-box environments. Annual visits to strip malls increased 18% last year com- pared with pre-pandemic traffic, according to retail and commercial real estate analytics firm RetailStat, which analyzed foot traffic data from 2,500 centers. n Scarce inventory and consumer strength. Once over-retailed from a square-footage perspective, some industry analysts think we have equalized supply and demand right now, while many others suggest demand is far outstripping supply. And even before there were signs of easing inflation, consumer demand remained strong and is projected to remain so, even as shopper credit begins to shrink. After a brief drop, luxury retail is returning, and other shoppers have shown resilience as they sample new retail categories, (think: mid- to upscale shoppers checking out dollar-style retailers). Economic doomsday dwellers who panicked when retailers like Bed Bath & Beyond left behind their large footprint stores may be able to unpack their worries: Interest in these spaces has become increas- ingly competitive and has been for some time. In Summit County, where we converted an Office Max into a TJ Maxx and Sierra in 2022, we had inquiries from multiple retailers anxious to secure the space with its well-studied demographics and traffic patterns. Other retailers are taking advantage of now-empty locations: Burlington CEO Michael O’Sullivan describes his company’s readiness to take over additional BB&B leases, having already secured more than 50 of its locations for $13.53 million. n Leasing term changes. Retail leases are also changing in this pro-landlord environment. Demand for retail is sufficiently strong that increasing numbers of contracts are consistent, fixed-rate rent, a development that lenders prefer as they’re easier to finance. Still, the Wall Street Journal notes that per- centage-of-sales leases will persist and will remain profitable for many landlords. Locally, analysts and investors have indicated low retail space availability and its influence on leasing rates. Overall in Denver, No crystal ball? Retail nevertheless looks bright Jimmy Balafas Principal, Kentro Group Please see Balafas, Page 15